As parents or grandparents, we want to help our families in any way we can. However, when it comes to debt, we have to be very careful. Despite our best intentions, it can be easy to make the problem worse. Many parents and grandparents simply give money when asked, but this can just turn you into an enabler and does not solve the underlying issues. As an old proverb once said: “give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime”.
This week, we’ve consulted with a multitude of financial experts on this issue. Here are the top 8 tips on how to provide financial assistance to your family the right way.
#1: Get Them to Use a Personal Budget
“Grandparents who are interested in helping their children or grandchildren get out of debt should first and foremost suggest the use of a personal budget. There are several websites which can help – Mint and BudgetTracker are two of them – it’s a great way for them to figure out where their money is going as well as identifying areas where they can cut back.
Once they have established a budgetary surplus, through reducing monthly bills and cutting back on spending, they should create a set of goals based on that amount and start sending it in until they are debt-free.”
#2: Ask Yourself These Hard Questions
“Three questions grandparents can ask themselves as they consider transferring some of their wealth to their grandchildren are:
- Do I have enough money to sustain my own retirement? If the answer is no, then no funds should leave your account;
- Am I helping my grandchild(ren) or enabling them? If the funds you plan on giving them will help them get out of debt, that’s great. If they haven’t given you a clear overview of how the funds will be used let them know you can’t help them until they do; and
- Will I be at peace with my decision regardless of or how the funds are ultimately used or with my own children being upset by not receiving funds? If I can honestly answer yes, then I can proceed with transferring the funds.
Money and family make for some interesting discussions and some terrible fights. Ensure that you are financially set up yourself, clear with your intentions and at peace with your decision.”
#3: Give Practical Gifts
“One of my top tips for grandparents looking to help their indebted grandchildren is to get practical gifts for holidays, birthdays, etc. If they’re struggling to get out of student loan or credit card debt, getting a gift card for groceries or a cash gift with the purpose of putting it toward loans can really help. Instead of getting a gift that they may not need, go for something practical that can help them focus their funds on paying off debt.”
#4: Provide the Resources for Learning
“One way to help out is take the time and energy (often in short supply for the adult children with young families) to research resources for them.
Refer them to different resources and financial coaches to explore ways to deal with the debt situation and learn to understand and effectively take ownership of creating and maintaining a spending plan.
I’ve had many parents pay my fee for working with their adult children. Together I would guide them through the process of understanding, creating and maintaining a budget that really works for them personally. In the end, this was the most empowering since it gave the children tools, experience and ownership of their own situation and solutions.”
#5: Find Non-Financial Ways to Help
“While your first inclination might be to pay the debts of your children or grandchildren, that might not be the most helpful thing you can do for them. Providing funds to get your loved ones out of a debt situation may complicate their financial problems. Often, the reason people end up in debt is because they are financially irresponsible or lack self-discipline. When they get bailed out of a sticky situation, they miss the opportunity to learn and grow from their mistakes and choices.
Instead of financial support, you could provide support in other ways, like helping with childcare so that parents can work extra hours. You could teach a skill or help them improve their opportunity to earn a better income.
You can also share your wisdom. The younger generations don’t have the experience in frugality and thrift that the older generations do. Share your money-stretching tips. Teach resourcefulness or cooking from scratch. Use you own life experience to impart priceless gems of wisdom so desperately needed by the youth of today.”
#6: Pay Off Debts that Erode the Most Income
“Identify the debts with the lowest balances and the highest monthly payments. Pay these obligations off first even though some of these accounts might have very low introductory rates. Remember it’s not about the cost of the debt that matters, it’s about how much of the income is eroded by the minimum payment due to each obligation.”
#7: Prepare a Formal Loan Agreement
“I can relate. My grandmother helped me when I was struggling with debt by paying one of my bills.
Draw up a loan agreement. You can have your child/grandchild sign a contract if you want the loan repaid. Set the loan term, the total amount loaned, the monthly amount, the repayment schedule and the amount of interest you will charge. You can charge interest each day or each week after the due date. If the interest rate is lower than the market rate the loan is considered a gift and subject to taxes. If the interest rate equals or exceeds the market rate, verify with a tax accountant to ensure the loan is not treated as income and to determine any tax liabilities.
Set a limit. Set a limit on how much you will loan or give and stick to it. Don’t give money directly. Send the money directly to the company for any bills your child/grandchildren requests help with.”
#8: Attach Stipulations to Your Help
“Before giving your grandchildren any money to help them pay off debt, it’s perfectly alright to have a few stipulations that go along with your generosity. Not blackmail, but rather some stipulations they’re going have to agree to before they receive your gift of potential financial freedom.
You can have them do a monthly budget and report back to you their first few months. You can have them show you how much money is coming in each month, where it’s being spent, and you can help them make the best decisions financially.
Another option is sending them through an online course and having them complete it before they receive your financial gift. The bottom line is they need to learn how to be better stewards of their money so they don’t end up back where they started.
If they don’t feel they need to do a budget or to take a course, then they also do not need a handout from you. Simply giving them money never solves the problem, it just masks the symptom temporarily.”
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